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Why Not Buy and Hold

Ever so often you’ll read a publication advocating that investors should invest 100% of their portfolios in “the Stock Market.”

Savvy readers will probably take note that this idea (buy and hold) is most popular near the end of a long bull trend, so consider this article a pre-emptive strike against this appealing but potentially dangerous idea.

Why Buy and Hold is ubiquitous

In order to examine the reasons behind a buy and hold strategy, you’ll need to look at the widely used Ibbotson Associates historical data. This data “proves” stocks have generated greater returns than bonds. In turn, have generated higher returns than cash. Many have fallen for the premise and rationalization behind this data.

Unfortunately, even experienced professionals accept these assertions without giving the idea any further thought.

While such statements may be true to an extent, investors should probe a little deeper into the motivation behind, and potential ramifications of a 100% investment 100% of the time investment strategy that defines “buy and hold.”

As evidenced by the last six years, although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run!

Although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run!

Financial Crashes

One could say the 2008 financial crash was a onetime happening but that would be incorrect.

If 100% of a portfolio had been put into stocks in late 1972 – over the following two years, about 40% of its value would have been lost. During that time, as well as during the all the other financial disasters, it would have been very difficult to withdraw an income to take care of relatively common expenses, such as purchasing a car, meeting unexpected costs like a new furnace or paying a portion of a grandchild’s college tuition. Not only is this financial folly, it’s psychologically unacceptable.

Keep in mind that the 1973/1974 and 2008/2009 debacles weren’t the only collapses that left investors licking their wounds. Consider the millions sucked from the market after the 1999 and 2000 bubble or the devastation investors experienced between 1929 and 1931. Stock Market crashes have left investors in ruins on a regular timetable.

The “100% invested 100% of the time” mindset is also to assume that in the midst of amaximum drawdown one will have the intestinal fortitude to not abandon a strategy and simply stay the course. An achievement the majority of investors could not possibly attain. It can be extremely difficult for most investors to maintain an out-of-favor strategy for six months. Let alone for many years.

So if 100% invested, 100% of the time is not the optimal solution for a long-term portfolio, what is?

Despite any cautionary counter-arguments above, investing in equities is reasonable but not for 100% of your portfolio, 100% of the time.

Become involved in your own finances

Become actively involved in your own finances. Simply handing money to an advisor to invest as they please is disadvantageous since they will never be as vested in an account as the investor. As well, it’s prudent to understand the advisor will make investment decisions based on their own psychological filters.

For example, they could be getting some kickbacks from companies to “promote” their stocks. Even if investors are 100% sure an advisor will take care of an account without an agenda, it is still imperative for investors to be actively involved in their own finances.

You make the effort to take care of your car and get its oil changed regularly. You make sure its tune-ups are done on time. You maintain your car because you know how important a car is you.

You make the effort to take care of your house and change the furnace filters and fix whatever needs fixing. You maintain your house because you know how important your house is to you.

Take 15 minutes a night to place trades

You make the effort to maintain your health by eating properly and exercising because you know how important your health is to you.

Why would you not make an effort to maintain your wealth as well?

Take 15 minutes a night and place trades that will have you invested for no more than days at a time. Get involved in a system that puts your money at risk less than 23% of the time.

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Marge

It took me only 5 minutes to put my trades onto IB tonight Thanks Jane- so easy and quick. You have lots of TIME putting on the trades. There is no stress and no decisions you have to make!! Easy Peesy!!

Mary

Trader Janie, I want to tell you how much that I am coming to admire you Your willingness to listen to our concerns and your new and repeated explanations to our concerns as well as your attempts at tweaking what you have already spent so much of your life ...

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Your services pay for themselves. I have belonged to many trading services and trading rooms and I find you and your services to be the most honorable and compassionate to the little guy.Keep up the good work,

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I am quite pleased with your strategies and am ahead almost $4K since I started on 9/14. I also am an old Connors fan.

I joined this service because I love the process of Quant trading, removes all of the emotions. Many days I when I was traveling, I couldn't even tell you where the markets closed, but just entered my signals per the system and watched my account grow.

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Ted

Trader Janie, your system looks terrific and thanks for posting all the histories in so much detail - most systems don't do that.

Great article! As I was reading it, I felt the crosshairs right on my forehead, having committed most of the sins you describe! I have long been a student of Larry Conners, his methods and research, I definitely believe in the system, but have often let my “trader” persona take ...

My background with Connors and Amibroker gave me greater appreciation for all the work you have put into getting the trading results that attracted me to QiT. I thank you for your efforts and look forward to continuing.

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Thanks for the new ETF Portfolio. I find it meets my trading style, and I can go short inside my IRA.

Let me share with you two different perpectives of the QT system of algo trading.In 1978, I joined a large Wall Street firm as a retail broker. In the following 13 years as a broker and as a Principal, I saw several things that kept most brokerage clients from making ...

Hi Jane,I just wanted to let you know I really appreciate the trade detail you post on the website. I like seeing the trade history of the past 30 days showing the entry and exit price. I compare this to my exit price just to make sure we are tracking ...

Subscribing to QiT allows me to save money and time by not having to pay for a datafeed, a trading platform, etc, and not spend hours running the stock screens, managing the datafeed, managing the trade signals, etc. Instead, all I do with QiT is check the signals each evening ...

I simply wanted to thank you for adding the Conservative play into QiT. I also appreciate adding the layer of clarity by identifying what each level means on the Signal sheet. Keep up the great work to continue improving QiT.